Foreign Exchange As An Asset – Class & Benefits – Managed Fx Accounts
Posted by Graham Briggs in General BusinessMay 24th, 2011 | no responsesOver the recent years we have seen more and more savvy investors looking for a new source of alpha, be this due to a poor performance from their stock portfolio or over exposure in the property market and huge losses to make up because of it. Causing the currency market or Foreign exchange market rising like a Phoenix from the flames to provide investors with an additional asset that may have been missing from their portfolios.
But why has the forex market suddenly been exposed as the market of choice for many investors?
There are a variety of reasons behind this. The Forex market has only been available to retail clients for just over a decade. Initially FX was traded by banks, investment houses, and other corporations looking to make the most of the daily volatility of exchange rates or to simply hedge their currency exposure. As an independent asset class Forex can generate more alpha than it would by merely serving as a hedging tool.
The key advantages of trading foreign exchange over other asset classes are as follows:
-Forex trading offers absolute liquidity to the investor. The liquidity of the foreign exchange market in unmatched by any other financial market. This means that traders aren’t tied into loss making trades and allows the trader to structure their risk management with use of various stop or limit orders.
-The FX market runs 24 hours a day 5 days a week, due to its geographical dispersion. The US market overlaps with the UK and Japan and therefore the flexibility afforded to FX traders is unrivalled by any other asset class.
-Traders are offered leverage to apply to their trades, varying from broker to broker typically ranging from 1:50 to 1:200. This enables the trader to hone in on and maximise their profits while still trading what they can afford to lose. However, leverage can be a double-edged sword and if applied without strategy can result in severe and very quick losses.
-The Forex market cannot suffer a crash (as in the stock market crashes of 1929, 1987, and 2008). Forex is traded in currency pairs. For example US Dollar vs. Japanese Yen. When trading this currency pair each loss of one currency is matched by an equivalent gain of the other currency.
-Forex managed accounts have come to the forefront of this asset class offering retail clients the opportunity to benefit from this attractive investment vehicle. An FX managed account has proven to be the route to market of choice for investors who know the benefits of Foreign exchange trading but don’t necessarily have the ‘know-how’ to trade Forex themselves. This enables said investor to diversify their investment portfolio without having to dedicate the time and effort required to become a seasoned Forex professional.
For those investors who like to leave the finer details to the professionals, Forex Managed Accounts can offer a fantastic benefit. Typically the investment can be tailored to suit the investors requirements. Whether you are a conservative or speculative investor there is an FX managed account to fit your requirements.
Most successful Managed Forex Accounts trade only three or four major currencies offering risk adjusted profitability. Currencies outside of the majors (EUR, USD, JPY, GBP) have been seen as too correlated to the majors and therefore unable to prove suitable diversification.
Top FX funds have shown that they can deliver suitably risk adjusted returns with the focus on managing risk rather than delivering percentage returns. FX robots or algorithms enable the Forex account managers to automate the trading, however, most will monitor the strategy to ensure that profits are maximised and losses minimised.
If it moves up and down independently then it is an asset class. The forex market definitely does this, and the low correlation, liquidity, and transparency that is offered by this investment vehicle are good enough reasons for currencies to be considered a prime candidate for inclusion in any investment portfolio. Couple this with the risk management, transparency and performance that some professional FX traders are showing and Forex is an attractive addition to any investors portfolio.
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